A consultancy or software company might issue four invoices a month. The bookkeeping is genuinely light. What is not light is everything that follows from the fact that your clients, your tools and often you yourself are somewhere else.
Reverse charge, in both directions
Almost every tool you use is bought from a supplier outside Estonia: cloud hosting, design software, CI, analytics, ad platforms. Where the place of supply shifts to Estonia, your company accounts for the VAT itself, declaring it as output tax and reclaiming the same amount as input tax where you have full deduction rights.
This is the single most commonly missing item in the returns we take over from other providers. It usually nets to zero in cash terms, which is exactly why people leave it out, and exactly why the Tax Board notices when the numbers do not match.
On the sales side, services to a business customer in another EU member state are generally reverse charged to them, reported on the VD report, and require their VAT number verified at the time of supply.
Contractors abroad
Bringing in a developer in Poland, a designer in Georgia or a project manager in Spain is normal in this sector, and each one raises the same three questions: is this a contractor or an employee in substance, does the payment create a withholding obligation, and does the activity create a permanent establishment in that country.
One contractor abroad is rarely a problem. A team of five, working exclusively for you, using your systems and following your schedule, is a different conversation, and it is better to have it before the fifth one starts.
Where you are, and where the company is
If you run the company from another country, that country may argue the company is effectively managed there and therefore tax resident there. For a one-person consultancy this is the most consequential question on this page, and the answer depends on facts rather than on where the company is registered.
It is worth documenting where board decisions are taken, and worth knowing whether your country of residence applies controlled foreign company rules, which can tax undistributed Estonian profit in your hands regardless of the deferral Estonia offers.
Taking money out
With high margins and low costs, the question quickly becomes how to extract profit. Dividends are taxed at 22/78 of the net amount with no social tax; salary and board fees carry income tax and 33% social tax but build pension entitlement and health insurance cover. The efficient answer usually mixes the two, and where the line sits depends on your country of residence, not just on Estonian arithmetic.
The expenses people get wrong
- Home office and equipment used privately as well as for work: partially deductible at best, and a fringe benefit question at worst.
- Conference travel that includes personal days: the private portion is not a business expense.
- Software bought in your own name rather than the company's: not deductible without a proper invoice to the company.
- Entertainment and client meals: deduction is restricted, and excess is taxed as a distribution.
What we set up for consultancies
- Reverse charge applied correctly to every foreign supplier invoice, automatically.
- VAT registration timed around your client mix rather than the threshold alone.
- A written position on permanent establishment and residence before it is questioned.
- A salary and dividend split calculated for your actual country of residence.
- Contractor agreements reviewed against reclassification risk.
Frequently asked questions
Do I charge VAT to a client in another EU country?
For services to a VAT-registered business in another member state, the supply is generally reverse charged to the customer, reported on the VD report, and their VAT number must be verified at the time of supply. Sales to consumers follow different rules.
Do I need to account for VAT on foreign software subscriptions?
Usually yes. Where the place of supply shifts to Estonia, your company declares the VAT as output tax and reclaims the same amount as input tax if it has full deduction rights. Omitting it is the most common error we correct.
Is a small salary enough, with the rest as dividends?
It depends on your country of residence and on whether you need Estonian health insurance and pension accrual. Dividends carry no social tax but build no entitlement, so the split should be calculated rather than copied.
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General information, not tax advice
This article reflects Estonian law as it stands on the date shown. Rules change and individual circumstances differ - confirm your own position with us before acting.